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A Carbon Trading System Worth Saving

The European Union became a pioneer in
tackling climate change by starting the first major cap-and-trade system
designed to reduce carbon-dioxide emissions by putting a price on them. But
analysts areincreasingly worriedthat technical mistakes, Europeâ€™s prolonged
recession and the failure of policy makers to strengthen the system is
undermining its effectiveness.

Like all
such systems, Europeâ€™s program caps the overall emissions that power plants,
steel mills and other industries can put into atmosphere. The cap, which is
regulated through permits, declines every year, forcing businesses to become
more efficient or buy permits from another firm or on the open market.

Recently,
the price of permits hascollapsedto less than 4 euros (around $5.25) per ton
of carbon, down from nearly 30 euros in 2008. This is troubling because the low
price discourages emitters investing in climate-friendly technologies and
fuels. In Britain, for instance, electric utilities have cut back on
cleaner-burning natural gas and are using more coal, which puts roughly twice
as much carbon into the atmosphere.

There are
several reasons for the sharp drop in carbon prices. European governments
issued too many permits in the first place because they miscalculated how many
would be needed to achieve their goals. And the recession, high unemployment
and weak demand for electricity have cut industrial emissions to the point
where companies simply do not have to buy allowances to meet their caps. European
policy makers havenâ€™t helped either. Earlier this month, the European
Parliament considered temporarily tightening the overall cap to boost the price
of allowances. But opposition by several countries that rely heavily on coal
torpedoed the measure.

What is most
worrying about the drop in the price of carbon is that it could discourage
policy makers elsewhere in the world, including Washington, from addressing
climate change if they conclude that Europeâ€™s experience is a bust. Several
national and state governments have started or are pursuing similar approaches.

But the news
from Europe is not all bad. Emissions have fallen by 14 percent among sectors
covered by the program in countries that have participated since 2005. Analysts
attribute much of that reduction to the cap on emissions, not the recession.
The system could work even better if Europeâ€™s leaders find the ingenuity to
strengthen it and the political courage to weather the criticism that could
result from higher electricity prices.

In addition
to its trading scheme, Europe has made real progress in dealing with climate
change through policies encouraging energy efficiency and renewable sources of
power like wind and solar. But nothing would do more to drive down emissions
than putting a meaningful price on them, either through a carbon tax or through
a cap-and-trade system. Europeâ€™s job is to put that system on a sounder footing
to make sure it doesnâ€™t undo the real progress it has made.